I haven’t been writing much about the multiemployer pension problem of late — not that nothing is going on there – check out John Bury’s coverage of MEPs — but because I was waiting for a Congressional Committee (with both House and Senate members) to release its idea of an MEP bailout.

Because they really want to bail out the MEPs.

But they’ve hit some snags.

Namely… who exactly is going to be paying for the bailout? And exactly which plans will get the bailout?

Let me use the trial balloon launched in the WaPo to set the stage for the report, which should be coming out Thursday or Friday due to a November 30 deadline (though obviously they could push it back).

Top lawmakers are considering a taxpayer-funded bailout for retirees who are members of certain failing pension plans, scrambling to solve a retirement crisis that threatens more than 1 million Americans.

A draft of the plan, obtained by The Washington Post, would direct the Treasury Department to spend up to $3 billion annually to subsidize payments for retirees from certain underfunded pensions.

It would also require benefit cuts, higher premiums and new fees levied against companies and union members in an attempt to make the pensions as financially solvent as possible. The proposal aims to require all parties involved to make significant concessions and caps taxpayer contributions.

A nice long piece by the Heritage Foundation: Why Government Loans to Private Union Pensions Would Be Bailouts—and Could Cost Taxpayers More than Cash Bailouts

“SUMMARY Less than one of every 500 workers and retirees who have union-run pensions belongs to a well-funded pension plan. To avoid workers bearing the consequences of irresponsible pension management by their employer and union trustees, plan advocates and some policymakers want taxpayers to bail out private-sector union pensions through highly subsidized government loans and other forms of assistance. Bailouts are never a good idea. They encourage more of the same type of mismanagement, negligence, and even corruption that contributed to the original problem. Bailing out pensions will only encourage businesses and unions to do more of the same—promising plush future pension benefits while failing to set aside the funds to pay for those promises.

“KEYTAKEAWAYS

“1. Private, union-run pensions are not too big to fail—but they are too expensive to bail out.

“2. Government loans to insolvent pensions are bailouts, and bailouts reward the behavior that caused the financial problems—and encourage future irresponsibility.

“3. A union pension would cost taxpayers more than $500 billion—and set the precedent for a $6 trillion taxpayer bailout of troubled state and local pension plans.”

In fact, there’s more of an argument to bailout state and local pension plans more than MEPs.

The people in MEPs are covered by Social Security, and many people in the failing public plans are not. The MEP benefit guarantees from the PBGC may be low, but they’re not zero – public plans have no backstop.

When government goes out of business, some people can end up with nothing.

IS IT ACTUALLY A BAILOUT, THOUGH?

Here is what the Heritage paper says about the Butch Lewis Act:

“Government Loans to Insolvent Pensions Are Bailouts

“Government loans are often characterized as subsidies instead of bailouts because, by offering lower interest than available in the market, the loans encourage more of a particular activity—such as attending school or purchasing homes—than would otherwise occur. Subsidies represent the difference between what the market would charge for a loan versus what the government charges. Bailouts, on the other hand, essentially provide get-out-of-jail-free cards to negate the consequences of wrongful, reckless, or irresponsible actions.”

….
I agree they are a bailout, but it’s not just by giving them under-market interest rates to borrow at.

It’s this: the government absolutely has no recourse to claw back any money from the pensions. Many of these MEPs are in decline because the number of active participants (and participating employers) are declining in numbers, while the retirees are booming in number. As we saw from the SOA study above, that’s a widespread problem.

The only way these “loans” would get paid back is if there were future contributions to the MEPs that paid not only for new participants, but for unfunded liabilities already accrued. The plans with MPRA applications are not showing growth in new contributions – that’s a huge part of the problem.

There’s more at the old post, but in short, that the MEP benefits wouldn’t get cut on failing plans through “loans” was a no-go. That’s for sure.

It didn’t help that various parties showed that even with said loans, a lot of the failing plans would still fail (i.e., run out of assets before all benefits were paid.)

As a special congressional committee works to solve a multiemployer pension crisis by the end of November, a new analysis by the Pension Analytics Group says that a leading idea of a subsidized loan program will save only one-third of participants in struggling plans.

Pension Analytics Group represent actuaries and economists who say they are worried “the clock might run out” before a viable solution is implemented.

With its Multiemployer Pension Simulation Model, the white paper projects about 200 multiemployer pension plans covering 3 million participants will become insolvent over the next 30 years, and that the Pension Benefit Guaranty Corp.‘s multiemployer fund will be exhausted by 2027.

….The model analyzed by the Pension Analytics Group assumes a pension plan could receive a one-time lump-sum loan equal to the plan’s funding deficit, which would be measured at a 7% discount rate.

The proposed new loan interest rate is 2%, and the term would be 20 years, when full repayment plus interest is due.

The analysis used 500 trials with asset returns varied stochastically to model plans projected to become insolvent within 30 years. According to the analysis, the average total number of participants in plans projected to become insolvent is 3.1 million in the baseline scenario, and 2 million if the loan program is implemented.

“Thus, on average, the loan program prevents plans covering over 1 million participants from becoming insolvent,” the paper states.

Better than before, but the plans would still fail, obviously.

And the whole “loan” idea was to try to say it wasn’t a bailout, but everybody noticed there was no real mechanism to make sure any loans would get paid back… and unlike bailing out the likes of AIG, which had a business that could generate money to pay back the government (and it did, but at a really poor internal rate of return for private investments…. but it was positive, so pretty good for a government “investment”), there was no real expectation that extra money would come from somewhere to pay back the loans.

You couldn’t even pretend that the fake arbitrage of high-performing stocks (they can only go up!) would pay back low-interest-rate loans because a lot of the loan money would be flowing out as benefits in short order.

NON-FAILINGPLANSNOTHAPPYWITHTHEPROPOSAL

While those in failing plans don’t want to see their benefits cut, they don’t have a huge amount of leverage (other than their political power in key midwestern states, which is why there’s a bipartisan desire of key politicians in those states to do some sort of bailout). So we know anything short of a complete bailout would make them dissatisfied.

But those not getting a bailout are also displeased… because they know part of this would be taken out of their hides.

MCAA and the UA have joined in opposition to the initial draft multiemployer pension plan reform proposal that is circulating on Capitol Hill as a discussion draft for the Congressional Joint Select Committee on Multiemployer Pension Plan Solvency. MCAA and the UA share the assessment that the current proposal is fundamentally counterproductive to the purpose of the Joint Committee and will drastically impair the ongoing solvency of the vast majority of well-funded plans.

The current draft proposal puts too much of the financial strain of the draft’s remedial provisions on the majority of well-funded plans. Instead, the draft focuses detrimentally more narrowly on the most severely underfunded plans only and tangentially puts the interest of the Pension Benefit Guaranty Corporation far ahead of the ongoing solvency and sustainability of plans that may never rely on PBGC resources for a bailout.

In the view of virtually all participants in the NCCMP coalition, the initial draft proposal is a very dangerous set of PBGC fee increases, imprudent funding restrictions, and administrative reforms (withdrawal liability and plan exit fees) that will imperil the long term sustainability of the current defined benefit model for well-funded plans.

MCAA is joining with other employer and labor groups in advising Joint Committee members that the initial proposal is a definite NONSTARTER. The consensus of labor and management groups is that prudent delay in overall reform consideration and much more balanced reconsideration for the benefit of the entire universe of plans is far preferable to hasty compromises in the remaining few days and weeks of this Congress.

The proposal lamentably doesn’t even include mention of the GROW Act/Composite Plan proposal. However, if the elements of the reform currently in circulation were to be interposed on to the legacy plan component of any Composite Plan – the adoption of the Composite Plan overall would not even be feasible.

Alas, a lot of this is so much hieroglyphics to me. They don’t link to anything in the above statement, so I don’t even know what the GROW Act/Composite Plan is (I bet it’s a form of the “loan” plan) … much less what the NCCMP coalition is (though it’s easily searchable.)

But this is a broadside to the politicians: you will be pissing off a lot of union folks in key areas, because not everybody’s pensions are in dire straits. This is the same problem with public pensions, by the way — the really horrid plans get the headlines, but there are loads of plans doing just fine, and they’re not interested in bailing out the profligates.

Of course, the generic taxpayers are also not interested in bailing out other people’s pensions.

FUNDINGRESTRICTIONS?

So, I haven’t see the details of the supposed proposal, but it’s obviously been revealed to key players. I didn’t see it in the WaPo piece.

The PBGC would gain more authority and resources to take financial responsibility for struggling plans. The draft proposal calls for a 30-year promise of $3 billion in federal funding per year to allow it to do more partitioning, a new variable rate premium for plan sponsors, a new “stakeholder” premium to be paid by retirees in struggling plans and a new exit premium for employers.

In addition to those new premium costs, healthy plans would also be squeezed by a requirement to use a more conservative discount rate when measuring liabilities. While 7.5% is a typical rate used by plans today, the proposal calls for a cap of the long-term corporate bond rate plus 2%, roughly 100 basis points lower. Those two changes have some multiemployer plan experts warning that many healthy plans could suddenly become classified as endangered and force employers to consider getting out or trustees to think about shifting to defined contribution plans.

Ah, that’s what they’re complaining about. Corporate bond rate plus 2% – at about 6.5% – is not too bad for a discount rate. Annuities can’t use that, after all.

But a lot of DB plans would all of a sudden look worse in funded ratios. And again, I would argue, that’s closer to reality, in that there’s no 7.5% return guarantee anywhere. I even think 6.5% is a bit high, but I’m willing to compromise.

So the few details I’ve seen so far seem like the best somebody like me could expect.

But union members definitely will not like this, any more than public pension participants like the expense of their benefits be clearly reflected — they see this as a distortion (while I see it as less of a distortion than current approaches), and they would see some benefit cuts off where they are currently… but, and this is the part they forget, those cuts would be far less than their PBGC guaranteed levels, which are super-low.

But they have always thought somebody would make them whole. Well, no. Everybody is going to have to give up a little bit. For a bailout, this sounds fairly reasonable to me.

Now, to be sure, Central States may slip in before Bailouts R Us completely shuts down. But I don’t think it will.

So far, Central States has not slipped in.

What I think will happen is not bailouts, but reducing these promises and to top-up people on the margins who need the help a lot more. I get into arguments with fellow actuaries about it, but there’s no “one neat trick” other than a particularly fatal pandemic that targets retirees (because if the productive part of the population is slashed, there will be worse troubles than merely not being able to pay for pensions.)

So if we’re not about to go for a Soylent Green/Logan’s Run remake, I believe the following will happen:

People will be paying more taxes (and not just “The Rich ™” – there’s not enough of them,and don’t have enough wealth)

Retirees will have benefits cut some

Bondholders will get a haircut, some drastically

The only bailout will be welfare programs for the poorest

Everyone will have to deal with having less.

….
Everyone will get whacked.

There will be no bailouts.

So, the little bit I’ve seen with the proposal is in line with those last two items.

Mind you, what is being proposed is a partial bailout, and plan participants in failing plans need to realize that the alternative to a partial bailout is not a full bailout but getting a hell of a lot less than that partial bailout.

Even if they managed to get a few top-ups for a few years from a congenial Congress & President (no matter the party), eventually the money situation will be that it will not be sustainable. So it won’t be sustained.

There are those where surviving just a couple more years will be good enough.

But for the pension plan as a whole… they need something more long-term.

So, I think the proposal doesn’t sound too bad — but whatever political kudos the politicians were aiming for, I think they’re unlikely to get. So it may be dead politically.

I assume something will be released this week. Whether it’s the idea we see above… well. No plan is going to make everybody happy, and if there’s a plan that makes everybody a bit unhappy but also has a chance to allow for less “surprise” plan failures… that would be better than what we have now.